Newmont Mining Corp – 5 February 1999
2
Numerous Changes and Charges
Newmont reported a massive net loss of $2.53 per share
for the fourth quarter of 1998 and a net loss of $2.47 per
share for the full year. During 1997, Newmont reported
earnings of $1.07 per share before one-time charges and
$0.44 per share after the one-time charges related to the
acquisition of Santa Fe Pacific Minerals. During the fourth
quarter of 1998, the company reported operating earnings
of $0.03 per share vs. $0.27 per share during the fourth
quarter of 1997. Operating results were in-line with
expectations.
Earnings were negatively affected by a number of one-time
charges and changes in accounting methods. Of these,
the most significant was: $37.9 million related to a change
in accounting policy to expense start-up costs rather than
capitalize them; and an impairment charge of $424.7
million, after tax, following a reassessment of the carrying
values of the mines, equipment and stockpiles at the
company's operations in Nevada. The market anticipated a
review of the carrying values but the magnitude of the one-time
charges surprised most analysts, us included. The
write-downs are not anticipated to negatively affect the
company's debt ratings. The company has a $1.0 billion
line of credit of which $600 million remains available.
Cash flow from operations actually improved during 1998
from 1997 due to changes in the mine planning and
optimization. The company deferred the mining from some
of the higher cost operations while processing previously
mined stockpiled ore. The mining costs associated with
these stockpiles was previously capitalized and thus the
cash costs per ounce are relatively high, from an
accounting standpoint, but operating cash flow is higher.
Operating cash flow increased to $373.5 million or $2.35 a
share vs. $238.8 million, or $1.82 a share during 1997.
Gold production during 1998 increased 3% to 4.07 million
ounces from 3.96 million ounces produced during 1997.
North American operations produced 2.94 million ounces
during 1998, in-line with production during 1997. The
largest increase in gold production was witnessed at the
Yanacocha mine in Peru. At Yanacocha, total gold
production increased by 27% to 1.34 million ounces
(686,000 net to NEM) from 1.1 million ounces during
1997. We anticipated continued production growth from
the Yanacocha mines. This operation remains one of the
lowest cost in the world.
Lowering 1999 Earnings
For 1999, we are lowering our earnings estimate quite
sharply to $0.34 per share from $0.46 per share. A
combination of lower gold price assumptions, adjustments
to our tax, production, and mining cost estimates all
negatively affected our estimate. At gold prices below
$300 an ounce, Newmont's earnings become increasingly
sensitive to minor changes in the earnings model. If gold
prices do not achieve better than $300 an ounce, our
earnings estimate could prove optimistic. We are
anticipating gold production of approximately 3.8 million
ounces during 1999 at similar production costs. Production
is anticipated to decline slightly as a result of lower
production from Newmont's higher cost operations.
Balance Sheet Issues
The company ended 1998 with cash of only $79.1 million
vs. cash of $146.2 million at year end 1997. Capital
spending during the last year was $420.8 million including
the acquisition of an additional interest in Yanacocha and
funding of Batu Hijau. For 1999, we anticipate capital
spending of $325 million vs. operating cash flows of $335
million. Should the opportunity be available, we would not
be surprised if management restructured their debt or
looked for equity funding despite the low gold price.
Asset Swap
Newmont and Barrick Gold Corporation announced an
asset swap in which the two companies will exchange
properties within the North Block of the Carlin Trend. We
have been anticipating such a swap for quite some time
and believe that it will be beneficial to both parties.
Essentially, property boundaries have been re-organized in
such a way that the two company's can make a more
effective utilization of the assets.
Investment Recommendation
We are maintaining our intermediate term and long term
Accumulate investment recommendations for the shares of
Newmont Mining Corporation. Newmont's shares are also
anticipated to be highly leveraged to changes in the gold
price and would likely rally sharply with a rising gold
price.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
regulated by SFA, and has been considered and issued in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law. The information herein was
obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.
Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments").
MLPF&S and its affiliates may trade for their own accounts as odd-lot dealer, market maker, block positioner, specialist and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side
of public orders. MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or short position in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from
time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report.
This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific
person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that
statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive
back less than originally invested. Past performance is not necessarily a guide to future performance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced
by the currency of the underlying security, effectively assume currency risk. |
